‘Digital HD’ Has Hopes High at Studios’ Home Entertainment Divisions

Electronic distribution is is taking over from packaged media in homevideo

There’s a tipping point in sight for the home-entertainment business, one in which consumer spending on titles delivered digitally as purchases, rentals and through subscription streaming will edge past spending on packaged media.

This shift to digital dominance may still be in the future, but as 2013 draws to a close it’s gaining momentum.

When 20th Century Fox Home Entertainment released the animated tale “Epic” in August, the title collected 200% more in revenue from electronic sell-through (EST) — or Digital HD, as studios recently agreed to call digital purchases — than a comparable title released a year earlier.

Fox’s “Life of Pi” has tallied 500% more in Digital HD than movies of a similar nature released a year earlier, said Fox Home Entertainment worldwide prexy Mike Dunn.

At other studios, there’s similar evidence of the increasingly mainstream appeal of digital formats. Two of Sony Pictures Home Entertainment’s biggest digital successes this year have come from “This Is the End,” with its appeal to the young men who are core digital consumers, and a less predictable family title, according to David Bishop, worldwide topper at Sony Pictures Home Entertainment.

“‘Hotel Transylvania’ was also a very strong EST performer, providing evidence that digital is now part of a mainstream business and is moving past the core demographics of the early adopters and the fan boys,” Bishop says.

“We feel like digital reached a tipping point this year and are treating digital distribution as a mainstream business,” says Amy Reinhard, exec VP and general manager for domestic homevideo at Paramount Pictures. “On certain titles like ‘Star Trek Into Darkness’ we’ve already seen (Digital HD) surpass (transactional VOD), so the future is here. Looking ahead we see the digital landscape continuing to expand.”

Digital has in fact gone mainstream, per London-based researcher Futuresource Consulting. In 2012, 25% of U.S. consumer spending on books, 58% of spending on music, 45% of spending on videogames and 43% of spending on video went to buy or rent digital formats. This year, Futuresource predicts, digital will edge up to 48% of video spending — and will account for over half of such spending as early as 2014.

EST is driving this growth. The studios decided give it the Digital HD moniker for purposes of packaging, advertising, social media and other communications.

EST gained 49% in U.S. consumer spending year-to-date through the third quarter. Subscription streaming, through services like Netflix, was up 33% through the third quarter, according to trade org the Digital Entertainment Group.

Digital rental transactions, including subscription streaming and transactional VOD, outnumber movie purchases, in part because consumers have much longer experience with them, they have been more widely available and they cost less than movie purchases.

Studios, however, are most aggressively throwing their marketing muscle behind Digital HD, understandably making the development of higher-margin EST their top priority.

“We are vigorously advocating for digital ownership. Our ability to provide the consumer with the utmost convenience, ease of use and confidence in digital is paramount to our success,” says Universal Studios Home Entertainment president Craig Kornblau.

His sentiment is echoed by senior execs across the industry.

Consumers who already have experience with digital formats like streaming and VOD are perfect candidates to move up to buying movies digitally, says Fox’s Dunn. Based on its own market research, Fox estimates that 80 million U.S. households have bought or rented movies or TV shows digitally. But among those households, 38 million have not yet started a digital collection. That, says Dunn, is the target market.

To appeal to those consumers, Dunn believes, titles marketed for digital purchase should meet certain criteria: They must be available in high def; they should be available earlier than DVD, Blu-ray and digital rentals; and they must be affordable. Fox goes out with Digital HD at $14.99 two to four weeks before other formats. While prices and early release windows vary by studio, all studios release at least some titles for digital sale prior to packaged media and VOD at prices generally below those of discs.

“The consumer response to early EST has been very positive,” says Ron Sanders, head of Warner Bros. Worldwide Home Entertainment Distribution. “In fact, we’re seeing material increases in digital ownership across the industry. EST has been up 50% each quarter this year and the number of retailers offering EST continues to grow.”

“The early window has been a meaningful driver,” Kornblau says. “Using ‘Despicable Me 2’ as an example, we exclusively released the digital version of the film two weeks before the Blu-ray/DVD release, specifically to leverage the Thanksgiving holiday.”

Sanders also cited an early EST offering in which Warner Bros. offered moviegoers a theater ticket bundled with an early HD download of “The Hobbit: The Desolation of Smaug,” calling the simultaneous promotion of theatrical and home entertainment mutually advantageous to the studio and exhibitors.

Other factors fueling EST: the addition of retailers and services offering digital movie sales, an increase in connected portable and in-home devices, and stepped-up marketing by studios, including making extra premium content available to Digital HD customers.

“The intrinsic value of compelling never-before-seen, exclusive content on our product continues to be a motivator to drive ownership across both physical and digital,” says Lori MacPherson, exec VP, global product management for Walt Disney Studios. “It is exciting to see more and more digital retailers offering this kind of content to expand the overall movie watching experience.”

“We believe that early EST windows and high-end combo packs that include original content and unique value-added items are critical to driving growth,” says Bill Clark, president of Anchor Bay Entertainment. “We also believe talent support, call-outs by talent and exclusive content at the individual retail and digital partners level are extremely important.”

The addition of mainstream distributors Target and Comcast — both of which will be honored at Variety’s Home Entertainment Hall of Fame—also have the potential to boost to digital collecting.

In October, Target, a longtime retailer of packaged video, joined the ranks of Amazon, iTunes, Walmart’s Vudu and Best Buy’s CinemaNow when it launched online movie service Target Ticket.

Target Ticket offers tools for parents and 30,000 movies and TV programs from all major studios for digital purchase or rental. The service was designed for consumers with little or no digital entertainment experience, says the retailer’s divisional merchandise manager for entertainment, Anne Stanchfield. She calls the service simple and intuitive.

“In the research we did with (customers) prior to developing the service, we learned that a significant portion of (them) hadn’t adopted digital entertainment yet,” she adds. “We drew upon (their) insights about what they wanted from a digital service to create Target Ticket. ”

If Target’s greatest benefit to Digital HD is the brand’s connection with families, Comcast’s may be its connection to the family TV.

Comcast, the leading pay TV provider in the U.S. with 21.6 million video customers, last month added digital movie sales in the early electronic sell-through window to its Xfinity TV Store. With its set-top boxes already in millions of homes, Comcast will enable consumers to access their Digital HD purchases directly on the living room TV without additional devices or apps.

“Since the launch of our on-demand platform in 2003 we’ve been at the forefront of delivering our customers movies and TV on their terms — anytime, anywhere,” says Marcien Jenckes, Comcast exec veep of consumer services. “Ten years later, 70% of our customers are using Xfinity on Demand at home, and our Xfinity.com/TV online platform and Xfinity TV Go app are seeing more and more usage every year. This September, viewing of streaming and downloadable content on Xfinity TV Go had increased three-fold, from about 2 million to 6 million hours, in just one year.”

“EST is very early in its growth cycle with tremendous upside,” says Lionsgate prexy and home entertainment GM Ron Schwartz. “We believe it is poised for continued and accelerating growth, driven in part by new players such as Comcast and Verizon.”

He adds that Verizon is a relatively recent entrant that has rapidly grown its EST share and the overall EST market, and early numbers for Comcast EST (with a 22 million subscriber base) look very promising.

Another factor in persuading consumers to collect Digital HD with the enthusiasm once enjoyed by DVD: ease of use.

“ Digital consumption is going to continue to evolve, especially as consumers become more comfortable with it and view it as a safe, easy way to enjoy content and build a digital library,” says Disney exec Janice Marinelli.

Another critical factor in persuading consumers to buy rather than rent digital titles may be to make Digital HD as portable, convenient and easy to use as the DVD.

“We look at how many consumers you need to bring into the model to make it the DVD business,” says Dunn, who figures that a growth rate of 20% to 25% per year for the next few years are what’s needed to reach DVD-like mass.